Why bond investors can't get enough of Argentina

After an active 2016, Argentine issuers attacked the new
year in full force. The government, banks and corporate issuers
came to the cross-border bond markets with transactions both
traditional and novel, ranging from plain vanilla bonds to
global-peso deals and Swiss franc issues.

The surge in deals reflects the fact that most issuers had
been frozen out of the market following the
country’s 2001 debt default.

"They’ve been playing catch up, especially the
sovereign and provinces," says Nicolas Bendersky, a debt
capital markets banker at Citi.

Tierra del Fuego, the smallest province in the country, was
among the throng this year. It issued a $200 million bond in
early April with a yield of 9.25%. Later in the month, lender
Banco Macro set its sights on a rare "global-peso" bond, a
$300 million-equivalent deal denominated in local currency and
marketed to investors in Europe and the US.

Appetite for even the most esoteric of transactions is
fueled by investors’ growing confidence on the
country’s economy. S&P Global Ratings lifted
the country in April to B from B-, citing its improved economic
policy. The agency pointed to advances made by President
Mauricio Macri’s center-right administration
in resolving large economic imbalances, while restoring the
country’s policy credibility.

Despite an economic contraction of 2.3% in 2016,
Argentina’s GDP could expand at 3% annually over
the next three years, S&P predicts.

As a result, Argentina is gaining a reputation, amid low yields
globally, as "one of the good places where you can pick up a
great carry," says Sean Newman, a senior fixed income analyst
at Invesco.

Investors are partial to Argentine debt because
"it’s a good credit and they don’t
have enough of it", says Diego Ferro, co-chief investment
officer at Greylock Capital, who forecasts issuers will keep up
the pace of bond sales in the months ahead. By tapping public
debt, "issuers can help offset the fact that the economy has
taken longer to recover than was expected".

The heightened number of offerings indicates issuers are
already feeling more positive, but a few difficulties have
arisen, leaving some observers to wonder if investors are
tiring of Argentine risk.

For example,
La Rioja targeted green bond investors, who rarely
entertain credits below investment grade. To get its B/B- paper
to market, the province had to settle for a 10% yield, above
the 9.625% yield that sources originally
told LatinFinance that it had anticipated.
"The yields reflected the fact it is a lower quality province,
with some risky characteristics," said Jason Trujillo, a senior
analyst at Invesco, at the time of the offering.

Meanwhile, the secondary market in provincial debt has not
yet caught up with the pace of new bond sales. Investors tend
to rotate from one provincial issue to another, says Lisandro
Miguens, head of Latin American debt capital markets for
JPMorgan. "When a new province is issuing, other provincial
debt tends to suffer a bit in the secondary market as investors
go for the new debt."

"If they were based anywhere else, some of the corporate
issues could be rated higher by some standards," he says.

Tarjeta Naranja is a case in point. The firm is
Argentina’s leading credit card issuer, with 207
branches and a 16.5% market share. Yet Moody’s
highlighted the weight of the sovereign ceiling in late March
when it rated Tarjeta Naranja’s $250
million-equivalent global-peso transaction.

"Naranja’s ratings are constrained by
Argentina’s operating environment, which remains
challenging despite various market-friendly policy reforms
implemented by the new administration," the ratings agency
said.

Macri’s reforms may be slower to take effect
than many would like, but already investors are responding to
the government’s moves to cut spending and reduce
deficits of the provinces. The changes send the right signal,
Ferro says. "The question is whether they can stay over the
years to make a transformational change."

An early indication of Argentina’s embrace of
Macri’s policies could come in October, when the
country holds legislative elections. "We aren’t
overly worried about it, but obviously political risk remains
the main risk in Argentina," says Aberdeen’s
Bevan. He does not expect any opposing parties to score a major
victory, leaving the current administration with the upper
hand.

If Macri's party performs well in the election, it could
have a long-term impact by reconfirming a mandate for change,
says Miguens.

Indeed, if reform-focused political parties gain seats,
investors are likely to become increasingly optimistic about
the possibility of Macri’s reelection in 2019. If
such parties lose seats, market confidence in the road ahead
may wobble.

"If Macri loses his support, we will likely see a bit of
fiscal slippage," says Newman.

Going local

Despite the surge in cross-border bond sales from Argentine
issuers, the local market holds increasing allure for the
country’s borrowers.

"Other than infrastructure there is not much need for large
dollar financings, as most of companies’ balance
sheets are peso-denominated," Bendersky says.

In a reflection of that, the government has worked to deepen
the local bank and capital markets. A
tax amnesty introduced by the Macri administration has
encouraged Argentines to repatriate assets held overseas.
Argentines were incentivized to bring their cash onshore
through tax breaks if they invested in closed-end mutual funds
or government bonds for five years.

An influx of fresh cash under this initiative has allowed
local banks to hold dollars and lend cheaply, Bendersky adds.
By tapping short-term financings of one to two years at 1.5%
rates, many businesses are borrowing locally, reducing the need
to raise funds in international markets.

For bigger borrowing needs, businesses with peso-denominated
balance sheets are also turning to local currency bonds
marketed internationally. Investors are drawn to the offerings
due to the high interest rates, with coupons deep into double
digits, and Argentina’s declining inflation rates,
Miguens says.

A rosy three-month horizon

Bankers are confident that bond sales will continue through
the middle of the year. Issuers including Banco Macro and the
province of Santa Cruz were in the pipeline as of late
April.

"The pipeline continues to be very robust and we have a lot
of deals coming in the next couple of months," says
Miguens.

Indeed, official forecasts indicate that the surge of bond
sales out of Argentina has much further to run.

"The government has forecast between $4 billion and $5
billion in corporate issuance for the year, and about half of
that has been done," Bevan says.

Now that the sovereign, provinces and better-known corporate
names have paved the way, investors can look forward to deals
from lesser-known companies, Newman says.

Several energy companies are eyeing their chances to issue.
One,
Central Puerto, said in September that it planned to issue
up to $1 billion in debt.

Already, energy deals are finding a market.
Genneia, a renewables company, raised $350 million for a
project to expand wind power facilities in Argentina.
Stoneway Capital, a power generator part-owned by Siemens,
raised $500 million to construct four new thermal-powered
projects in Buenos Aires province, valued at $637 million and
with a combined capacity of 686 MW.

The list goes on. As Argentina seeks to renew its energy
infrastructure, which has been starved of capital for over a
decade, many corporates in the area have sought funding from
the capital markets.

"Almost all corporate issuance has been in the energy
sector," Miguens says.

More project-specific deals, such as
Stoneway’s, may come to the market now, predicts
Peter Wietrak, an emerging markets credit analyst at
Invesco.

"High quality companies can always come to the market, but
later this year you will see more utility companies, given the
objectives of the Argentine government to auction off more
power generation projects," he says.

Those auctions may spur more borrowers into the capital
markets, says Aberdeen's Bevan.

But there are limits on how long the run of new bond sales
will continue. Indeed, many see a deadline looming in the
northern hemisphere's summer.

"Most of the activity will happen before the summer,"
Bendersky adds. "By the fall, issuers and investors will be
monitoring the Argentine legislative
elections." LF

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